Econ

econ xproblem_1 questiong_2

1. (Price taking firm’s short-run profit maximisation problem) Suppose you are the manager of a watchmaking firm operating in a perfectly competitive market. Your cost of production is given by , where q is the level of output and is the total cost. The fixed cost is $200 (obviously!) and the marginal cost is . 2 () 2002Cqq   () Cq() 4MCqq 

a. If the price of a watch is $100, how many watches should you produce to maximise profits?

b. What will the profit level be?

c. At what minimum price will the firm shut down?

2. (Long-run market equilibrium 1) Consider a city that has a number of hot dog stands operating throughout the downtown area. Suppose that each vendor has a marginal cost of $1.50 per hot dog sold and no fixed cost. Suppose also the maximum number of hot dogs that any one vendor can sell is 100 per day.

a. If the price of a hot dog is $2.00, how many hot dogs does each vendor want to sell?

b. If the industry is perfectly competitive, will the price remain at $2.00 for a hot dog? If not, what will the price be?

c. In the perfectly competitive equilibrium you found in the previous part, suppose each vendor sells exactly 100

hot dogs a day and the market demand for hot dogs from vendors in the city is . How many vendors are there? 44001200Q P  

d. Suppose the city decides to regulate hot dog vendors by issuing permits (i.e. a hot dog vendor has to hold a permit to operate in the city). If the city issues only 20 permits and if each vendor continues to sell 100 hot dogs a day, what price will a hot dog sell for?

e. Suppose the city decides to sell the permits. What is the highest price that a vendor would pay for a permit?

3. (Long-run market equilibrium 2) “If a lump sum subsidy (i.e. one independent of output) is granted to every firm in a competitive industry, the output of the original firms will fall.” Explain whether this statement is true, false or uncertain. Your analysis should focus on the long-run market equilibrium with identical firms, fixed factor prices and free entry. What happens to the number of the firms in the industry? [Hint: Draw two diagrams; one for a representing firm and the other for the industry. Start with a long-run equilibrium without the subsidy and then think what will happen when it is introduced.]

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4. (The effect of a specific tax 1) The competitive market price of a bottle of gin is $15. The government decides to impose a $5 tax per bottle to be paid by consumers at the point of purchase [NB: This is called the consumption tax; but it is different from shōhizei (the goods and services tax, GST)]. Show using demand and supply analysis what will occur to the equilibrium price and quantity. Explain the welfare effects of this taxation.

5. (The effect of a specific tax 2) In an effort to raise revenue from wealthy people, the government introduces a tax on motorboats to be paid by consumers of motorboats. If producers of motorboats are not very wealthy and they are not very responsive to price changes, then is the tax likely to be effective in raising revenue from the wealthy? [Hint: Use the demand and supply analysis.]

6. (Import tariff and quota) Taiwan is small in the international steel market and its Government offers domestic steel producers protection from low cost imports. When Taiwanese steel producers expect their marginal production costs to increase, they will prefer tariff to quota if they expect the world price and domestic demand to remain constant. Explain whether the statement in italics is true or false. [Hint: Start with the simplest case that we looked at in class. Will the Taiwanese steel producers prefer tariff to quota if their marginal production costs remain the same? That is, is an increase in PS greater when tariff is in place? Then think what occurs to the PS when the marginal production costs increase, i.e. the domestic supply schedule shifts upwards.]